Considering taxes in beneficiary designations

[samclem]

If I wanted everything to be even steven I just go 50-50. What I'm trying to do is to do have any inheritance distributed tax efficiently, just like I try to set up my portfolio to be tax-efficient.

If this is all about reducing taxes, then set up a trust and trickle out the taxable money to the child with the lowest income at a rate that you think will keep him under the tax rate of the high earner, until it runs out.

The Roth goes to whoever.

The tIRA or conventional 401k would go to the low earner/saver up to the point the dough puts him in the same/worse tax situation as the high earner/saver.

There might be a big disparity in what each receives if things are done like this, but the taxes will be minimized, which is apparently the goal.

Obviously, I wouldn't do that. I'd split it evenly before taxes, give each kid 1/2 of each type of account, and let each figure out the best way to minimize their taxes since they know best what they are earning at the time, what they anticipate they'll earn in the future, if they are going to come into a big pile of money from a spouse's relative, what the tax landscape is like at that time, and what they think it will be like in the future.

 

[CardsFan]

I guess I don't view it that way. If I wanted everything to be even steven I just go 50-50. What I'm trying to do is to do have any inheritance distributed tax efficiently, just like I try to set up my portfolio to be tax-efficient.

I understand what you are trying to do, but there are so many moving parts I just don't see it necessarily working as you would like.

A lot can change, even over a short time.

Will you always know what each child is earning and their tax bracket? They may decide to do their own taxes, or hire a CPA.

Will the lower earner always be that way?

Will the lower earner decide to cash out a lump sum of the tIRA to buy a house? Start a business? There goes some of the tax advantage.

Will the laws change to preclude the use of a stretch IRA? There goes some of the tax advantage.

What if the higher earner decides to FIRE when you go, live of your Roth and tIRA dollars, letting their own stash grow, so they can leave it to their children?

It sounds like you have two level headed kids that will appreciate whatever they receive. Why run the risk of creating friction between them after you are gone? In pure dollars, your plan would give the lower earner less (before accounting for taxes). They may understand why, but will a spouse?

Just my 2 cents.

 

[Texas Proud]

I guess I don't view it that way. If I wanted everything to be even steven I just go 50-50. What I'm trying to do is to do have any inheritance distributed tax efficiently, just like I try to set up my portfolio to be tax-efficient.

Even thought I would not go to this much trouble, I was trying to come up with a simple way to do it... here is my thought...


Open up a separate taxable account... invest in whatever you want... once a year when you do taxes calculate the amount of money needed to make both of them whole... make sure this account has that much in it.... leave it to the person who is supposed to get extra...

This has the benefit of leaving all other accounts alone after you get them the way you want... it also re-balances once a year... and if the one you are concerned with actually gets into a higher bracket than the other you can easily change beneficiaries to the other....